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Phoenix Surveys the Ashes

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Total net worth of all American households slid last year to levels lower than those of 2004 in the first such decline since 2002. No wonder, then, that even the richest Americans feel less wealthy, and economists like Walter H. Zultowski, PhD., the Phoenix senior vice president who designed and analyzed the survey, are noting a reversal of the “wealth effect” that, in recent years, provided an environment of prosperity, whether real or perceived. “We have entered into a period of ‘negative wealth’ which gives us a unique opportunity to study the attitudes and behaviors of the high net worth in a negative wealth environment,” Zultowski says.

Phoenix’s 10th annual survey was conducted between Jan.30 and Feb. 20 of this year by Harris Interactive and comprised online interviews with more than 1,700 randomly selected individuals with a net worth over $1 million–not including the value of their permanent residence. Results were adjusted to account for the inclusion of additional Gen-Xers and 240 pentamillionaires. The Phoenix Companies, based in Hartford, Conn., is a manufacturer and wholesaler of insurance and annuity products for the high-net-worth market.

The percentage of survey respondents who feel less wealthy jumped to 74% this year–a significant leap from 47% in 2008 and 19% in 2007. While the experts debate the estimated length of the recession, 35% of participants feel the worst is yet to come before the country starts to recover. And 31% anticipate a prolonged economic downturn for the next two years.

The absence of optimism accounts for the fact that every question relating to personal financial security dropped to its lowest level since the survey was introduced a decade ago. The percentage of high net worth who were very optimistic about their personal financial future in 2009 dropped by half over the last two years: Only 17% report a high level of optimism compared to 34% in 2007. Perhaps the most damning response came when asked whether they felt their wealth is “extremely” or “very secure” for the long term. Only 28% said they did–a significant drop from 41% last year and 45% in 2007.

And if you feel that retirement planning is not a major concern of your high-net-worth clients, you may be living in a past era when assets seemed only to grow. Maintaining their lifestyle in retirement continues to be a prominent issue for the affluent, but for the past two years, concern over “outliving my money” took a slight precedence, “a surprising result for high-net-worth clients,” says Zultowski.

With lack of security comes a change in financial priorities. For the second consecutive year, these high-net-worth investors said preservation of assets trumped return on assets–this year by the widest margin, 18 percentage points–since 2003.

Confusion over how to invest manifested itself in the 50% who agreed with the statement: “Lately I’ve become confused about the best way to invest my money.” It was the first time for so much confusion since the 2003 bear market when 47% concurred. Not surprisingly half of respondents said they had become more risk averse, while others varied between unchanged and, in the case of 20%, more risk tolerant!

But the survey holds some good news for wealth managers. Last year, respondents cited performance and fees as reasons they were turning away from their financial advisors and seeking new advice. ‘When things start to go bad, they turn away,” Zultowski posits. “But once the deep end is reached, they tend to turn back.” In fact, some 73% said they are getting advice from a professional advisor this year compared to 67% last year. Although 27% don’t seek professional advice, that, too, is an improvement over 33% in 2008. While 36% of respondents do not have a primary financial advisor, those who do, rely on a variety of sources: 16% rely on financial planners who also sell products, 14% on full-service brokers, 11% in fee-based financial advisors, and 6% on accountants (probably small business-owners, Zultowski suggests).

Still this is no time for wealth managers to rest on their laurels. Of those who use an advisor, 13% say they expect to seek new representation in the next 12 months, a number that is up 8% from 2008. And 15% are not sure whether they will look for a new advisor or not.

Reasons clients are dissatisfied with their advisors have not changed much over the last three years, Zultowski points out. But the percentage of investors with reasons for doing so has ballooned. Except for dissatisfying returns–fairly steady or at least expected at 32% in 2007, 42% in 2008 and 38% in 2009–31% objected strongly to advisors who did not offer “the products and services I need,” a figure that jumped from 16% last year, and 37% felt their advisor was not proactive in maintaining contact. This number increased 11% from last year, although it is a definite improvement over the 44% who were deemed inadequately proactive in 2007! Advisor empathy has also enjoyed an uptick, it seems. Only 18% complained this year that their advisor doesn’t understand/appreciate their goals–a whopping improvement over the 38% who disappointed clients in that respect last year.

With 10 years’ hindsight, Zultowski feels capable of offering some tips to advisors. Don’t underestimate or minimize clients’ concerns, he warns; respond to their needs, particularly their fear of outliving their assets; and add longevity planning to the roster of services you offer alongside investment advice, retirement planning and estate planning.

The degree of bearishness in the 2009 survey was deeper than he expected, Zultowski admits. On the other hand, he is encouraged by the fact that respondents indicated their intention to increase stock purchases during the next three years, after plateauing last year in favor of bonds and ETFs–which soared by 6% in 2008. “This may be a positive sign,” he says.